The Hindu Business Line : Fight to the finish – or shake hands with a rival

Companies choose where they would cooperate and where they would compete.
The strategists, with the accountants and engineers, should be sitting together working out the probability of success from pursuing a fight to the finish versus burying the hatchet and shaking hands with a rival.

C. Gopinath

Towards the end of February, the world of home entertainment saw a two-year battle for a technology standard being settled. This was the fight between Sony’s Blu-ray and Toshiba’s HD DVD. Both sides had supporters in their respective camps. Sony had Walt Disney and MGM, apart from retailers such as WalMart and Target. Toshiba had, among its supporters, Microsoft, and Universal Studios.

Then Warner Bros, which generates the bulk of Hollywood’s output, cast its vote in favour of Blu-ray. The response from Toshiba was almost immediate. It was like the Election Commission announcing the results of the recent poll and the trailing candidate conceding defeat. Toshiba announced that it would stop manufacturing its HD DVD disks and players. Apart from Toshiba, the losers would be all those people who purchased the Toshiba player, especially these last few months during the Christmas shopping spree. But isn’t that the price you pay for being an early adopter of a new technology?

Toshiba and Sony had chosen to let the market settle the battle of what should be the standard. (Fortunately there was no bureaucrat in a commission sitting and making the decision.) You may recall a similar battle in the 1980s when Sony was the loser. That was the fight between Sony’s Betamax and Panasonic’s VHS standards for the video cassette players. The availability of vast numbers of tapes in the VHS standard settled that fight; the market had spoken. Ironically, many acknowledged that the Betamax was a technically superior product.

Compete or cooperate

You don’t have to feel sorry for Toshiba for its loss. Companies choose where they would cooperate and where they would compete. The scientists involved in research and development would always justify that they were on the brink of a killer product and only a little more investment was required to bring it to the market. But the strategists, with the accountants and engineers, should be sitting together working out the probability of success from pursuing a fight to the finish versus burying the hatchet and shaking hands with a rival.

For, an alternate path to going it alone and waiting for the market to pick the winner is for the early movers to cooperate and establish one technology as the standard. Then, the late comers will find it worthwhile to fall in line. To do that, you would need to provide the technology at a competitive price so there is no incentive for the rival to develop one of its own. That requires taking a long-term view and being confident that you would be able to recoup your costs of producing the technology and the standard in the sale of the downstream product, rather than look at the technology alone as a profit centre.

Philips approach

Philips took that approach when it initiated research into laser technology and optical disks in 1977, got Sony on board in 1979 and the two together worked to develop the compact disk technology and got the rest of the world to fall in line. A standard was quickly established.

In 2004, Sony and Samsung entered into a broad cross-licensing arrangement wherein they agreed to use each other’s patents free or for a discounted fee. This covered about 90 per cent of their patent holdings. But they were not giving away their crown jewels and made a calculated decision of what they would keep out of this arrangement, such as Sony’s Playstation technologies, or Samsung’s home networking, or those related to flat-screen television sets. They would perhaps wait and see what the market decides, and change their minds later.

This strategy of seeking to establish a standard for product technology either through licensing, or generating market support, can be seen in many other industries. Sometimes, rival technologies may survive in the market, though the minor player would have to work towards compatibility with the major player to survive. Recall the case of the IBM/Microsoft format of the personal computer taking off, leaving the pioneer, Apple, biting the dust and scrambling to keep up.

Toyota vs GM

In the automotive sector, Toyota has been quietly pushing its technology of gasoline-electricity hybrid engines for cars. It was the first to release a hybrid in the market, and it has exchanged its patents with Ford and Nissan who also now use the same technology. GM, with its hangover of having been the leading auto company in the world, initially rejected this system of hybrids, hoping to build on fuel cells for generating the electricity rather than the massive batteries that Toyota uses. But money is short and with losses from operation for three years in a row, there is no room for GM to think about the long term. So it then said it would develop its own hybrid standard working with DaimlerChrysler. That seems to be going nowhere and it may soon come back to working with Toyota.

While rival technologies can survive in this sector and standard development does not bring the kind of rewards that it does on the entertainment sector, the heavy investment, scale economies and the probability of risk drives rivals to cooperate. Moreover, Toyota would feel good as being the standard setter in the industry (beyond its famed production system), apart from the quiet satisfaction it is about to get from beating GM as the largest automobile company in the world, in terms of both production and sales.

Cooperate – and fight too

Of course, you can cooperate and fight at the same time. Toyota and GM have a 50:50 joint venture in California, while competing in the market for leadership. Fuji and Kodak have been doing it for years collaborating on developing the smart film but going to court with regard to market access in their competitor territories. Ranbaxy and GlaxoSmithKline have a partnership to develop new drugs even while Glaxo goes to court to restrict Ranbaxy’s freedom to produce generics.

Some cooperation can create its own rivals. That is the purpose, or at least should be, in government policies that require a majority local equity holding in a joint venture arrangement. The government hopes that technology transfer takes place and the local partner learns enough to stand on its own. (It is probably payback for the times when foreign companies ended taking over the country.) This will work as long as the local partner sees this as an opportunity to learn. Many states in West Asia have policies requiring a local partner in all foreign investment ventures, but more often than not, the local partner lends his name and sits in London, enjoying the monthly cheques that arrive.

Grin and bear it

But the Chinese are smart. The Shanghai Automotive Industry Corporation (SAIC), a government corporation, has 50:50 joint ventures with Volkswagen (since 1985) and GM (since 1997) for the local manufacture of cars. After learning the ropes from these ventures, SAIC set up a separate wholly-owned corporation in 2006 without a foreign partner to make cars and export them! GM and Volkswagen’s response has been what most foreign companies do when faced with a government decision in China: grin and bear it. After all, the Chinese are said to have a traditional saying: A housekeeper can never replace a master. The housekeeper needs to move out and set up a separate house.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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